Introduction to Retirement Planning

Transcription

1 Introduction to Retirement Planning for School Students

2 Retirement: is a stage in the life cycle of an individual when one stops being an active part of the productive/ working population on account of advanced age. Every individual aspires to lead a life of dignity and financial independence even after one retires. However, one needs to plan for the same. In fact, one of the most important reasons to save during one s working years is to provide for a financially independent and dignified post retirement life. Retirement planning: Planning for the purpose of achieving financial independence after retirement. Pension: Regular income to the individual after retirement. Retirement planning requires three basic steps: 1. Determine how much annual income will be needed in each year of retirement. 2. Determine how much corpus must be accumulated in retirement savings by the start of retirement in order to fund the expenditure during retired years. 3. Determine how much must be contributed to retirement savings in each working year remaining in order to accumulate the required amount determined in step #2. Step 1: Determine how much annual income will be needed in each year of retirement: this depends upon the a) existing and expected life style of the person b) cost of living at the time of retirement. At the time of retirement, while some of the needs like transportation etc may decline; other expenses may increase like medical expenses etc. With increasing longevity, better medical facilities, one may be expected to lead a more active retired life than our parents and grandparents. Hence, the amount of annual income needed at retirement shall be broadly be same as our existing expenses factored by cost of living i.e inflation rate. Numerical: How much monthly income is required on retirement after 35 years if one spends Rs 5000 per month today?

3 If you are going to retire in 35years, the general level of prices will have increased due to inflation say in the past 35 years, inflation has caused prices to increase so that something that cost Rs1 in 1975 cost Rs7.31 in Assuming a similar rate of inflation in the next 35 years, we estimate that Rs 5000 today would equate to Rs after 35 years; Rs 5000 * 7.31 = Rs36550 In other words, in 35 years you would need an estimated Rs36550 per month to pay for expenses that are costing Rs 5000 today. Numerical 2: If rate of inflation is 4% p.a., the income required after 35 years in above shall be 5000 ( ) 35 i. e. Rs A=P(1+r/n)^nt P = principal amount (the initial amount you borrow or deposit) r = annual rate of interest (as a decimal) t = number of years the amount is deposited or borrowed for. A = amount of money accumulated after n years, including interest. n = number of times the interest is compounded per year Step 2: Determining required level of accumulated retirement savings; The next step is to determine how much you must have accumulated in your retirement savings in order to be able to withdraw sufficient funds to cover your living expenses viz Rs per month today or Rs per month in future ( 35 years hence ) for each year of retirement life. In order to determine this amount, you need to estimate how long you are likely to live after retiring. Life expectancy tables provide an estimate. If you plan to retire at age 60 and life expectancy tables predict that you will live to age 72, you will want to accumulate enough retirement savings by age 60 so that you can withdraw enough money each year for next 12 years to pay for your living expenses. Targeted Corpus = Rs (expected monthly expenses) * 12(months) * 12 (life expectancy after retirement) = Rs /-

4 Step 3: Determining required annual contribution to retirement savings; The third step is to determine how much you must save each year between now and the start of your retirement in order to accumulate the desired retirement corpus. Again, you would like to consider that accumulated contributions will earn an expected rate of return and will also lose some purchasing power due to expected inflation. Targeted Corpus Starting age for retirement savings Years to retirement Yearly savings Monthly savings Thus, we can conclude that the earlier one starts savings for retirement, the easier it becomes during financial planning as the burden on consumption expenditure is reduced. The EFFECTS OF COMPOUNDING

5 PENSION Pension provides regular income to an individual after retirement.the need for pension is uniform across all section of society the requisite amount of pension will depends on the lifestyle that an individual needs to maintain along with the estimated cost of living during their retirement. Accrued amount of pension is crucial function of savings during the working years as also number of years taken to build sufficient corpus for desired amount of pension. TYPE OF PENSION PLANS Defined Benefit (DB) Defined Benefit Pension plan is one in which a specified monthly benefit (payment) is available on retirement. It is predetermined by a formula based on the employee's earnings history, tenure of service and age, e.g. 50% of last pay drawn is paid as pension to central government employees (pre ). Defined Contribution (DC) Defined Contribution Pension plan in which the pension amount is dependent upon the aggregated retirement corpus which in turn is determined by the amount of individual contribution. Individual contributes for her/his own pension & parallely contribution can also come from employer/central or State Government in addition to individual contribution. The amount of contribution is predetermined. HISTORY OF PENSION IN INDIA Traditionally, pension schemes in India have primarily been funded by the employer. Government sector defined benefit pension scheme was financed by Government for their employees. This pension system was inherited from the British Administration. Indian Pension System has 3 distinct broad groups:- Group I covers citizen of the country through a standardized, Govt. run pension schemes which offers basic

6 coverage and is primarily focused on reducing poverty in old age amongst the most destitute like BPL, widows & disabled. Govt. financed pension has very limited coverage in our country- It covers persons above 60 years for poor, elderly and persons employed by the Government. Government of India launched National Social Assistance Program (NSAP) w.e.f 15 th August 1995 for providing social assistance benefit in the form of pension to the aged, the BPL households, in the case of death of the primary breadwinner and for maternity. Indira Gandhi National Old Age Pension Scheme (IGNOAPS) Scheme provides old age pension to BPL population above 60 years of age. Central Government assistance for month per beneficiary up to 79 years & Rs.500/- per month for 8 years and above. Indira Gandhi National Widow Pension Scheme (IGNWPS) Scheme provide pension to BPL widows in the age group of yrs. Central Government assistance for month per beneficiary. Indira Gandhi National Disability Pension Scheme (IGNDPS) Schemes provide pension to BPL persons with severe or multiple disability in the age group of years. Central Government assistance for pension month per beneficiary. State Governments may also provide the various pension schemes at state level for different target groups( BPL population, farmers, widows and senior citizen etc) e.g. Madubabu Pension Scheme launched by Orissa Government, Destitute Agricultural Laborers Pension Scheme launched by Tamil Nadu Government, Manipur old age pension Scheme, Sanjay Gandhi Niradhar Scheme launched by Govt. of Maharashtra, Sanjay Gandhi Niradhar Scheme launched by Govt. of Maharashtra, Sandhya Surkasha Scheme launched by Govt of Karnataka, Kerala Agriculture Workers Welfare Pension and Kerala Unorganized Retired Workers Pension Fund Scheme etc. Group II is mandatory occupation pension system where employee and employer contribute towards their pension. It covers workers in the organised sector through a Defined contribution-cum-defined benefit scheme.

7 Civil Servants' Pension (CSP) is a traditional defined benefit scheme which runs on the basis of pay-as-you-go-system, for employees of Central Government who were recruited up to 31 st December, 2003 and employees of State Governments recruited up to the effective date mentioned in notifications issued by those governments. Employees Provident Fund Organization (EPFO) administers the following two old age income schemes, which are mandatory for all employees in the organized sector, earning a monthly salary of less than Rs.6,500/:- (a) The Employees Provident Fund (EPF) (b)the Employees Pension Scheme (EPS) The Employees Provident Fund (EPF) Scheme is an individual account defined contribution scheme wherein both the employee and employer contribute to the fund at the rate of 12% of the employee's pay which can be withdrawn at the time of retirement. There are a number of provisions under the scheme for pre-mature withdrawal of accumulation. The Employees Pension Scheme (EPS) is a defined benefit scheme, based on a contribution rate of 8.33% from the employee to which government makes an additional contribution of 1.16%. EPS was introduced in 1995, and is applicable to the workers who entered into employment after In case of death of a member the scheme provides for a pension to the spouse for his/her remaining life Group III is a voluntary, private funded system, including individual savings plans, insurance, etc. Purely voluntary schemes are present in a very restrictive form through PPF, superannuation schemes and personal pension plans provided by Insurance Companies. Personal Pension Plans and Group Pension Products offered by the life insurers are being supervised by the Insurance Regulatory and Development Authority (IRDA). Schemes offered by the Mutual Funds are regulated/supervised by the Security Exchange Board of India (SEBI). Need for pension reforms in India India has nearly eighty million elderly people, which is one eighth of world's elderly population. This segment of population is growing at a rate of 3.8% per of 1.8% for the overall population and the existing pension system only covers 12% of Indian workforce.

8 Non-sustainability of the existing pension system by the sharp increase in financial burden on the Government and the other employers on account of pension liabilities. Challenge is to provide a pension solution for the 90% of the informal sector workers and vast majority of this population is not covered by any formal old age income scheme. They are dependent on their earnings and transfer from their children or other family members. These informal systems of old age income support are imperfect and are becoming increasingly strained. Increase in life expectancy due to improvement in healthcare facilities,evolution of nuclear family systems and rising aspirations due to increase in per capita income, education etc. are some of the factors likely to exacerbate the problem of old age income security in future. Pension reforms From 2000 to 2007, a marked shift in pension policy in India was witnessed after introduction of a New Pension System. Initial milestones on the road to pension reforms for Government of India was to reduce the burden of providing Defined Benefit pension to Government employees and the provision of pension for un covered population from the unorganized sector respectively. Pension Fund Regulatory and Development Authority was established by Government of India on 10th October 2003, PFRDA to act as a regulator for the pension sector. The mandate of PFRDA is development and regulation of pension sector in India. The New Pension System, based on defined contribution.gives a direction to the pension reforms for a long term viable model and sustainable solution to the problem of old-age income security. The New Pension System (NPS) was made operational through a Government of India notification dated 22nd December, It has been made mandatory for new recruits in the Central Government (except Armed Forces) from 1st January 2004 and Twenty eight (28) State/UT Governments have also notified the New Pension System for their new employees. It marks a paradigm shift from the defined benefit to a defined contribution regime. It is based on the principles of defining upfront the liability of Government, giving choice to subscribers, facilitating portability of labour force and ensuring transparency and equity in the pension industry. Later the New Pension System is changed to National Pension System. NPS is also made available to all Citizen of India w.e.f on a voluntary basis and extended its coverage to unorganized Sector (May 2011), corporate sector and caters to economically disadvantaged sector through low cost model. The New Pension

9 System has been designed to enable the subscriber to make optimum decisions regarding his/her future and provide for his/her old-age through systemic savings from the day he/she starts his/her employment. It seeks to inculcate the habit of saving for retirement amongst the citizens. About 11 Lakh Central Government employees (excluding employees of autonomous organisations) and 16 Lakh State Government employees from 22 States are covered under National Pension System (NPS). Remaining other State Governments has made significant strides in this direction. Swavalamban Yojana is launched by Government of India on to support individuals in the unorganized sector in achieving old age security. Any citizen of India, belonging to the unorganized sector, is eligible to open a NPS account subject to the following conditions: Should be between years of age. Subscriber should not be covered under any social security scheme. Government of India will contribute Rs 1000 per annum to all eligible NPS Swavalamban accounts where the subscriber deposits a minimum of Rs 1000 to maximum Rs /- per annum. The incentive is presently available till and around 16 Lakh subscribers are covered under this scheme till MAIN FEATURES AND ARCHITECTURE OF THE NATIONAL PENSION SYSTEM 1. The National Pension System is based on defined contributions. Subscriber can open NPS account through POP or Aggregator. NPS tier-1 Account is non withdrawal account and there will be seamless transfer of accumulations in case of change of employment and/or location. It will also offer a basket of investment choices and Fund managers. 2. NPS is mandatory for new recruits to the Central Government service (except the armed forces). The monthly contribution would be 10 percent of the salary and DA to be paid by the employee and matched by the Central Government. A similar contribution pattern is also prescribed for employees of the autonomous bodies of Central Govt. 3. Individual who has opened NPS A/c can have a voluntary tier-ii withdrawal account at his option. The NPS A/c assets in tier-ii would be managed in the same manner as the NPS tier-1 pension A/c. The accumulations in this account can be withdrawn anytime without assigning any reason. 4. National Securities Depository Service Limited (NSDL) has been appointed as the

10 Central record keeping agency (CRA) under NPS.The recordkeeping, administration and customer service functions for all subscribers of the NPS shall be centralized and performed by the CRA. 5. Pension Fund Managers (PFMs) are appointed by PFRDA to manage the retirement savings of subscribers. The PFMs are required to invest strictly in accordance with guidelines issued by the PFRDA. 6. Annuity Service Providers (ASPs) are appointed by PFRDA for delivering a regular monthly pension to the subscriber for the rest of his/her life post retirement. 7. Individuals exit at attainting the age of 60 years from the NPS. At exit, the individual is required to invest minimum 40 percent of pension wealth to purchase a pension from ASP. The individual would receive a lump-sum of the remaining pension wealth, which she would be free to utilize in any manner; individuals have the facility to invest more than the minimum prescribed 40% for receiving higher pension. Individuals would have the flexibility to leave the NPS prior to age 60. However, in this case, the mandatory annuitisation would be 80% of the pension wealth.

11 Abbreviations DB: Defined Benefit DC: Defined Contribution ASP: Annuity Service Provider CRA: Central Recordkeeping Agency NPS: National Pension System PFMs: Pension Fund Managers PFRDA Pension Fund Regulatory and Development Authority PRAN Permanent Retirement Account Number POP: Point of presence BPL: Below poverty line Definition Aggregator: Aggregator shall be the point of interaction between the subscriber and the NPS. Corpus: Subscriber contributions accumulated and invested for specified period. Lum Sum: A single payment for the total amount due. Annuity: Monthly sum (pension) that will be received by the subscriber at the time of retirement. Annuitisation: The amount invested to receive annuity (monthly pension) by the subscriber at the time of retirement.

Presentation on Pension Reform in India and PFRDA By Ms. Mamta Rohit Chief General Manager Pension Fund Regulatory and Development Authority Pension History In 13 th century B.C. Roman Emperor, Augustus

SOCIAL SECURITY AND PENSIONS IN INDIA PRESENTATION APRIL 2-3, 2003 COLOMBO (SRI LANKA) U.KSINHA MINISTRY OF FINANCE, GOI, NEW DELHI FRAMEWORK OF THE PRESENTATION BASIC FACTS ON INDIAN ECONOMY COMPONENTS

New Pension System (01 January 2004) Frequently Asked Questions Department of Economic Affairs Ministry of Finance, Government of India North Block, New Delhi 110 001 For any further questions or clarifications,

National Pension System (Nps) NPS, regulated by PFRDA, is an important milestone in the development of a sustainable and efficient voluntary defined contribution pension system in India. It has the following

Question 1: What does NSAP stand for and when was it launched? Answer: NSAP stands for National Social Assistance Programme. NSAP was launched on 15th August, 1995. Question 2: What is the justification

1 2012, Ministry of Overseas Indian Affairs What is the Mahatma Gandhi Pravasi Suraksha Yojana (MGPSY)? This is an integrated social security scheme of the Ministry of Overseas Indian Affairs (MOIA) for

FREQUENTLY ASKED QUESTIONS NATIONAL PENSION SYSTEM for NON RESIDENT INDIANS About NPS 1. What is National Pension System? NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement

Best Investment Options Under Section 80C to save tax -Prathiba Girish Executive Summary - Most of the Income Tax payers try to save tax by saving under Section 80C of the Income Tax Act. However, it is

Section II Question 6 The earning member of a family aged 35 years expects to earn till next 25 years. He expects an annual growth of 8% in his existing net income of Rs. 5 lakh p.a. If he considers an

How does access to social pensions and public health care affect the well-being of elderly poor in India? Sitakanta Panda and Sourabh B. Paul (IIT Delhi) Katharina Michaelowa and Viola Werner (UZH) Indo-Swiss

Round Table Pension Business in India R Vaidyanathan Guest Editor Pension Business: Introduction Liyaquat Khan India has never had a pension system for the population across the country, as has been in

Pension Fund Regulatory and Development Authority is in the process of drafting regulations for Retirement Advisers. Towards this end, the Authority has prepared a Concept Note which is being placed on

From: OECD Framework for Statistics on the Distribution of Household Income, Consumption and Wealth Access the complete publication at: http://dx.doi.org/10.1787/9789264194830-en An explanation of social

IOPS Member country or territory pension system profile: TRINIDAD AND TOBAGO Report 1 issued on September 2011, validated by the Central Bank of Trinidad and Tobago Update as of 15 February 2013 1 This

Income Tax 2013-14 we have provided here a detailed guide for Income Tax 2013-14 Assessment Year 2014-15 applicable to Salaried Class Employees. Government has brought three important changes this year

EPF SAVINGS AND YOUR RETIREMENT Employees Provident Fund 3 Content Are Your Retirement Savings Sufficient? Why Is It Important To Diversify Your Source Of Retirement Income? What Are The Benefits Of EPF

Old-age Pensions in and China - Issues and Prospects Abstract: The study analyses the state of pensions in China and, the two populous countries in the world accounting for over 37% of the world population.

Retirement planning with Group Superannuation After a valuable professional career with an organization, employees require the security of a regular income flow when they retire. Organizations help employees

Beginner s Guide to the Capital Markets Financial Education An overview of capital market Products available in capital market Securities and Exchange Board of India An Introduction Securities and Exchange

OFFER DOCUMENT National Pension System (NPS) Pension Fund Regulatory and Development Authority (PFRDA) originally established by the Government of India through a resolution dated 10 th October, 2003 &

Annexure A1 Form 102-GP Page 1 National Pension System (NPS) Withdrawal Form for Claim of Accumulated Pension Wealth on exiting before the age of normal superannuation for Government Employees (To be filled

Frequently Asked Questions on EPF. Q1.Who are required to be enrolled to PF? Any person employed directly or indirectly by the establishment, working in or in connection with the establishment, including

Group Insurance MODULE - 3 6 GROUP INSURANCE 6.0 INTRODUCTION The life insurance policy can be issued to individual as well as to groups. We have already discussed the various plans available for individuals

Understanding Types of Returns & Time Value of Money Using Excel July 2012 Annualized Returns Annualized Return It is a method of arriving at a comparable one-year return (annual return) for investments

Decumulation phase some information and preliminary analysis for the work of OPSG DC sub-group Matti Leppälä OPSG 19.5.2014 Definitions Decumulation or payout phase is the period during which assets accrued

Group Insurance An overview Mohith Saradhy Ibexi Solutions Page 1 Table of Contents Executive Summary...4 About the Author...4 Introduction to Group Insurance...5 Features of Group Insurance...6 1.1. How

Retirement Benefits in Hong Kong Introduction In Hong Kong, there are several types of retirement benefits sponsored by different parties as shown below. Government-sponsor - Old Age Allowances from the

NATIONAL ACADEMY FOR TRAINING AND RESEARCH IN SOCIAL SECURITY READING MATERIAL EMPLOYEES PROVIDENT FUND ORGANISATION BOOKLET ON SALIENT FEATURES OF EMPLOYEES PENSION SCHEME 1995 AND CALCULATION OF PENSION.

China's Pension Reform China's Social Security Pension System and its Reform Kaiji Chen University of Oslo March 27, 2007 1 China's Pension Reform Why should we care about China's social security system

Retirement Protection Forging Ahead Chapter 3 Multi-pillar System and Underlying Principles World Bank s Multi-pillar model 3.1 In face of the challenges brought by an ageing population, many places around

2016 Expected Reform of Japanese DC Code and Its Implications for the Future DC Prevalence in Japan as Contrasted to US 401k Tomohiro KAWAGUCHI Retirement Consulting, Mercer Japan Ltd. 3-20-2 Nishi-shinjuku,

District of Columbia Teachers Retirement Plan Summary Plan Description 2007 This booklet is a Summary Plan Description of the benefits provided to you under the District of Columbia Teachers Retirement

FAQs on Payroll and Income Tax These Frequently Asked Questions (FAQ s) are general information based on the commonly sought responses and do not amount to advice on any particular matter. You are advised

CLIENT FACT SHEET July 2010 Understanding superannuation and superannuation contributions Superannuation is an investment vehicle designed to assist Australians in saving for their retirement. The Government

The Dutch Pension System an overview of the key aspects The Dutch Pension System an overview of the key aspects Dutch Association of Industry-wide Pension Funds (VB) Contents 1 Introduction 6 2 The Three

The reform of the Hungarian pension system (A reformed reform) Focus The objective of the comprehensive pension reform currently under way in Hungary is to return to the two-pillar pension system, based

Rashtriya Swasthya Bima Yojna (RSBY) What is Rashtriya Swasthaya Bima Yojna (RSBY)? Rashtriya Swasthaya Bima Yojna is a Central Government Scheme announced by the Prime Minister Manmohan Singh on the previous

Cambodia: Moving forward toward Better Social Security Better Factories Cambodia Social Security An Overview The 1948 United Nations Universal Declaration of Human Rights stipulates that everyone, as a

Civil Service Retirement System Reform in Taiwan- Viewpoint from Public Service Pension Fund Operation Presented by Chang, Che-Shen Minister, Ministry of Civil Service April 24, 2012 1 Agenda 1 Introduction

Denmark Denmark: Pension system in 212 There is a public basic scheme. A means-tested supplementary pension benefit is paid to the financially most disadvantaged pensioners. There is also a scheme based

Tax benefits to individual who are disabled, Parents who have dependents who are disabled including minor and certain benefits to private sector for providing employment opportunities to disabled As per

Are you ready for Question Time? Background The new flexible pension regime will come into effect on 6 April 2015 There is already extensive press coverage of the changes In understanding the changes it

RETIREMENT ACCOUNTS The various retirement investment accounts discussed in this document all offer the potential for healthy longterm returns with substantial tax advantages that will typically have the

Brochure More information from http://www.researchandmarkets.com/reports/1839253/ Life Insurance Market Report - India Description: The Indian life insurance sector has grown at a fast pace since liberalisation

Australia: Retirement Income and Annuities Markets Contractual Savings Conference April 2008 Greg Brunner Pension system Age pension in place since 1908, funded on a payas-you go basis Means testing. The

Reverse Mortgage By Paul, Divya & Chakrapani, Jyoti Introduction: Reverse Mortgage is a product that will allow senior citizens to avail themselves of funds by mortgaging their residential property. The

FAQ on PF Act 1 What is the Contribution for Provident Fund both by the Employer & Employee? Ans : The Employee contributes 12% of his /her Basic Salary & the same amount is contributed by the Employer.

U.S. ARMY NAF EMPLOYEE RETIREMENT PLAN March 2014 INTRODUCTION This booklet is published by the U.S. Army NAF Employee Benefits Office. It is intended to provide you with useful information about the U.S.

All about deduction under section 80C and tax planning Background for Section 80C of the Income Tax Act (India) / What are eligible investments for Section 80C: Section 80C replaced the existing Section

How to Retire 7 Years Early & Accumulate 10 Crores on Retirement Is it Really Possible to Retire Early? The thought of retirement often conjures up visions of a worry-free couple lounging by the beachside